This Homebuilder Has a Long Way to Go

Most homebuilders have reported higher orders and healthier backlogs lately, signaling that a housing recovery might be on its way. The latest homebuilder to jump on the bandwagon is KB Home (NYS: KBH) , which reported a marked improvement in these metrics in its fourth quarter.

Nevertheless, things might not be so bright for KB yet.

So far, so good
KB delighted many by reporting an improvement in two critical metrics -- deliveries and orders -- in its fourth quarter.

The company's homebuilding revenue rose 6% from the year-ago quarter to $451 million, as home deliveries climbed 4% to 1,995 units. This comes as a breather after the 31% and 27% slumps in its third-quarter deliveries and revenues, respectively.

The big surprise was the fantastic 38% jump in KB's net orders to 1,494 units. This factor particularly stands out in KB's case as first-time buyers (whom KB targets heavily) retreated from the market after the expiry of the big-booster federal tax credit last year. The return of these buyers is further evident from Beazer Homes' (NYS: BZH) numbers. Beazer, too, caters largely to first-time buyers, and its last-quarter orders surged 33% to 1,006 homes, taking its backlogs (an important indicator of future revenue) up by an astounding 81% from last year.

Likewise, KB's backlogs surged a staggering 74% to $459 million. What's good is that this is in line with what most peers are reporting. Not just Beazer, but Standard Pacific's (NYS: SPF) third-quarter backlog revenue also climbed 42%, and Hovnanian Enterprises' (NYS: HOV) fourth-quarter backlogs were up by 26% in spite of a fall in its total revenue.

Here's the sad part
Not all's good with KB's numbers, though. Its cancellation rate remains high at 34%. Though this is an improvement from 37% last year, the rate nevertheless is on the higher side when compared to those of its peers. As an example, Standard Pacific's cancellation rate stood at 16% in its last quarter, while upscale builder Toll Brothers' last-quarter cancellation rate was just 7.9%. Even Hovnanian's rate improved to 21% from 24% in its fourth quarter.

But the biggest dampener came in the form of a slip in KB's bottom line to $13.9 million from $17.4 million a year ago. Pressure on margins because of lower deliveries in the higher-margin communities, and higher selling and administrative expenses were the culprits. It is particularly discouraging that even a $19.8 million joint-venture gain in the quarter could not lift the bottom line.

Desperate to woo
At a time when homebuilders are going out of their way to attract buyers, KB is trying out some "green" tricks too.

The company is banking heavily on its Built to Order model, which is based on the concept of customized homes. To make these homes even more attractive, KB is now offering solar-power systems in them across its South California communities. This move also highlights how serious KB is about its plans to launch more solar-powered homes, as announced earlier.

KB has good company in the industry when it comes to trying out new stuff to woo buyers. Hovnanian is trying its luck by grabbing land at low prices, while Standard is dressing up its homes with innovative architectural designs and concepts.

KB's strong focus on green efforts also became evident when it agreed to implement the U.S. Environmental Protection Agency's new guidelines that require new homes to be more energy-efficient.

Moreover, KB is also trying to boost revenue by opening new communities in higher-income markets. KB might well keep its hopes of attracting customers alive, given how the recent housing data is signaling a slow yet gradual return of home buyers.

The silver lining
Why have the housing sector stocks rallied in the past few months while the sector is still shedding blood? It's the flurry of recent positive housing data that seems to be slowly replacing the housing doldrums with more glee.

The latest shot of joy homebuilders received is from the National Association of Realtors report of pending home sales in November having touched their highest level in almost 19 months. Looks like home-buyers are finally digging out their long-lost shopping bags again!

Not just that, the National Association of Home Builders/Wells Fargo Housing Market Index (these names might sound heavy, but it's important for a prudent investor like you to know them) reported that the November index touched its highest level since May 2010. In October, too, the index had posted its highest one-month gain in more than a year, sending the homebuilder stocks into a tizzy. New home sales also rose sequentially by 1.6%, 1.3%, and 5.7% in November, October, and September, respectively. Clear indicators of improving consumer confidence, indeed.

The Foolish bottom line
The housing sector might be picking up, but KB may still have a long way to go before instilling confidence in investors' minds. Improving metrics might not mean much unless the homebuilder starts bucking up its net profits. Moreover, KB's financials aren't the kind we can swoon over (it has an unimaginably high total debt-to-equity ratio of 358%). While KB makes this up, take a look at other homebuilders that seem better positioned. But if you're looking for well-positioned financial stocks to buy, check out "The Stocks Only the Smartest Investors Are Buying."

At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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